Monday, March 3, 2014

Period of existence of independent project offices shall not be clubbed to determine PE in India

Facts:
a)    The assessee, a Japanese company, had established project offices in connection with three Projects. In some of the contracts assessee received supervision fees (‘FTS’) from the Maruti Udhyog Ltd for supervising the installation of machinery and equipments supplied by it;
b)    The assessee contended that it did not have any PE in India to tax the supervision income as business income under Article 7 of India-Japan DTAA. Therefore, it would be taxable as FTS under Article 12(2) of such DTAA;
c)    The Assessing Officer (‘AO’) held that if the enterprise had a PE it was not necessary that each project should have a separate PE. He further contended that the supervision period of all the contracts had to be aggregated and the same was more than six months to constitute a PE in India;

d)    Accordingly, the AO held that supervision fees received under contract was effectively connected with a PE and brought it to tax under section 115A.

Reserve and surplus acquired on amalgamation is not revenue receipt; held not taxable under sec. 28(iv)

Enhancement of capital reserve due to amalgamation (in nature of merger) of assessee-co. with other companies, was not in revenue field and, thus, was not in nature of income so as to be considered for taxation under section 28(iv).
The Tribunal held as under:
1)    Provisions of section 28(iv) provide that besides the profits and gains from business or profession (‘PGBP’) carried on by the assessee, any other benefit or perquisite arising therefrom is also chargeable to tax under the head 'PGBP’;
2)    The conditions precedents for such taxability are:
(i)   There should be benefit or perquisite, and
(ii)  Such benefit or perquisite should arise from the business or the exercise of a profession;
3)    The expression 'arising from business' essentially implied that the benefit or perquisite would be in the nature of a business receipt or revenue receipt. No matter how wide could be the scope of section28(iv), the difference between a capital receipt and revenue receipt could not be overlooked;
4)    Thus, unless a receipt was revenue receipt, it could not be in the nature of income and unless it was in nature of income, it could not be considered for taxation under section 28(iv);
5)    The instant case was of amalgamation in the nature of merger which was proposed for the purpose of better, efficient and economical management to withstand the recessionary trend in the economy and to obtain advantage of economies of large scale;
6)    Even if there was a benefit in the process, such a benefit could only be in the capital field, because it was related to the non-trading assets and capital. What it affected was the capital structure of the assessee-company and the manner in which business was consolidated;

7)   Therefore, the enhancement of its capital reserve as a result of amalgamation could only be construed as a benefit accrued to the assessee. But such benefit was not in revenue field and was, thus, not in nature income. Accordingly, there was no occasion to invoke section 28(iv) – ITO v. Kyal Developers (P.) Ltd [2014] 42 taxmann.com 70 (Kolkata - Trib.)

Order passed by CIT under sec. 119 is an administrative order which isn't appealable before ITAT

Order passed by Commissioner under section 119(2)(b) was an administrative order against which appeal before Tribunal under section 253 was not maintainable.
Facts:
a)  The assessees approached the Commissioner for regularization of their returns in terms of section 119(2)(b);
b)  The CIT rejected said applications. However, the Tribunal directed the Commissioner to consider the case of the assessees afresh, after giving proper opportunity of being heard to them.
c)  Aggrieved-CIT filed the instant appeal.
The High Court held as under:
1)  In view of section 253, appeal against the order passed by the Commissioner under section 119(2)(b) was not maintainable;
2)  Such order passed by the Commissioner under section 119(2)(b) was an administrative order against which appeal before Tribunal under section 253 would not be maintainable;

3)  Thus, the Tribunal had materially erred in entertaining the appeals against the order passed by the Commissioner under section 119(2)(b) and had materially erred in passing the impugned order directing the Commissioner to consider the case of the respondent-assessees afresh. – CIT v. Rasida Ibrahimbhai Vohra [2014] 42 taxmann.com 85 (Gujarat)